There has been a huge amount written about and invested in blockchain developments but, for all the hype, there is still a massive amount of confusion, misunderstanding, and lack of delivery from this technology. In fact, it’s sitting firmly in the trough of disillusionment today. Will it recover?
For around five years, I’ve been talking about blockchain technologies. Initially, everyone thought I was talking about the Bitcoin blockchain technology. I was not; I was talking about any currency based upon blockchains, which includes Ripple, Erethreum, Digital Asset, and R3. However, there is still misunderstanding because when people talk about blockchain, in most cases, they mean distributed ledgers. The two are linked but distinctly different: a blockchain is part of a distributed ledger along with a digital currency, digital signature, and consensus system, whereas a blockchain on its own is just a method of recording a transaction.
Even when these terms are clarified, there is still an argument over which ledger system is the best. Obviously, the first question must be: the best for what? For example, some ledger systems have more transparency than others, so you need to establish whether the transaction being recorded needs to be public, private, or semi-private. That question determines which system you might choose to use.
There is also the issue that this technology is not yet developed. This is why most of the companies developing blockchain and distributed ledger systems talk about an experiment, a proof of concept (PoC), or a proof of work (PoW). A good example of this is when the Erethreum blockchain was hacked and $60 million of its Ether currency was stolen. The founders then rebooted the blockchain – something called a hard fork – and said that they were starting all over again because this is an experiment. A test.
These points illustrate that we have not yet identified the right technologies for the distributed ledger systems we want to build. That is why we are in a trough of disillusionment, which begs the question of why people are so excited about this technology. Richard Branson, Reid Hoffman, Dee Hock, and even Ashton Kutcher and Mike Tyson are talking about it. What is going on?
The real answer is that everyone who has looked under the hood can see that the development of an Internet-based database, where transactions are authenticated in real-time by the network, will be a revolution in how we record value exchange. The distributed ledger structures, using blockchains to record transactions, create immutable records of proof for all time that can be authenticated and notarized for low cost with complete trust.
That is the fundamental reason why this is of interest, as it means anything that needs a legal record of proof can now be recorded for almost no cost. Land deeds; digital identities; monetary exchanges; the purchase of rare items; even births, deaths, and marriages can be recorded on such systems. In other words, all the areas where we record transactions on paper today can be replaced with a much cheaper and far more reliable system of record via distributed ledgers and blockchains.
However, there is one fundamental challenge to the implementation of these technologies: how to use them.
The how, rather than the what, is the key question we need to answer. This is because the use of a distributed ledger blockchain service is for shared databases between counterparties who have no trust and need a trusted record to cooperate. A shared database is how many experts talk about distributed ledgers and blockchains, and that generates the greatest challenge: who is sharing what with whom? In many cases, the biggest issue is how to create a shared system, not how to develop the software or technology.
Take clearing and settlement, which is one of the earliest areas of blockchain development in banking. Clearing and settlement involve cross-border structures between different trade bodies at the moment. Those bodies include central banks, central securities depositories (CSDs), central counterparty clearing systems (CCPs), banks, brokers, and institutional investors. Applying a blockchain to create nearer real-time clearing and settlement at far lower cost makes sense – industry estimates are that it would save over $20 billion a year in processing costs – but creating an agreement between all those counterparties is the challenge.
How to move from an existing industry infrastructure to a new one that is yet unproven is the challenge. How to agree what that new industry structure will be is the challenge. Again, it is the how, not the what, that is the challenge.
Still, I am hugely excited about the possibilities of distributed ledger blockchain technologies but, for the moment, I am reserved about when it will deliver. I still believe it will be five or more years before we truly see the benefits. In other words, for blockchain technologies to cross the chasm, industry and government agreements must be made first, and that is why it is going to take time. Do not underestimate this though, as ultimately it is going to fundamentally transform everything.
As with other technologies like the Internet, the PC, and cloud, we are overestimating the speed of change and underestimating the impact of blockchain technologies. This technological change may take far longer than we expect, but it will deliver far greater benefits and change than any of us can imagine today. That’s why I’m betting on blockchain big time.
Gather more insight on blockchain. Download the executive brief Making the Next Moves with Blockchain.